The Growing Landscape of Cannabis Banking - PRESENTED BY: DOMINIC HULICK, CAMS & KYLE DENNERLEIN, CAMS, CCBP FEBRUARY 3, 2021 - Mercadien

The Growing Landscape
of Cannabis Banking
PRESENTED BY: DOMINIC HULICK, CAMS & KYLE DENNERLEIN,
CAMS, CCBP
FEBRUARY 3, 2021

     ADVISORY | TAX | ACCOUNTING | WEALTH MANAGEMENT

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Your Presenters

    Dominic Hulick, CAMS    Kyle Dennerlein, CAMS, CCBP
           Supervisor           Senior BSA Analyst
    dhulick@Mercadien.com   kdennerlein@Mercadien.com
         609-689-2315              609-689-9700

  Mercadien’s Financial Institutions Services Group

                                                          3

Agenda
• Three Tiers of MRBs
• Initial Assessment
• Implementing Your Cannabis
  Banking Program
• State Regulations
• Risk Based Customer Due Diligence Requirements
  for BSA/AML Compliance
• Requesting Information From Customers

                                                   4

Direct vs. Indirect MRBs
• Direct:
  o At some point, they
    touch marijuana in
    the supply chain.

• Indirect:
  o They do not ‘directly’
    manufacture or
    dispense cannabis.

                             5

Three Tiers of MRBs

• Helps to
  determine the       Direct MRBs
  due diligence,
  (CDD/EDD) &
  risks associated    Indirect MRBs

  with them

                      Incidental Business

                                      6

Tier 1 (Direct MRBs)
•   Handles marijuana at some point in the supply chain
•   Will likely need a license by a state as a legitimate MRB
•   Generally considered highest risk
•   These include but are not limited to:
     o   Cultivators
     o   Seed Producers
     o   Delivery
     o   Transporting
     o   Dispensaries
     o   Extraction
     o   Product testing
     o   Processing

                                                                7

Tier 2 (Indirect MRBs)
• Directly supporting cannabis whose primary
  customers are Tier 1
  o Some examples:
     − Hydroponic Suppliers
     − Licensing consultant
     − Payment Processors
     − Software providers
     − Packaging suppliers
     − Advertising

                                               8

Tier 3
• Usually considered incidental
  businesses
 o Some examples:
    −Landlords
    −Accountants
    −Attorneys

                                  9

CDD Tier 1 MRBs
• Regulatory expectation
• Whether you're planning to bank cannabis or
  avoid it, you must have a policy in place
• Your risk assessment will drive your policy

                                                10

Initial Assessment
• Typically, you gather all the information you
  normally would when opening a business
  account, such as:
  o Legal business name
  o DBAs
  o State(s) of operations
  o Website
  o URLs owned & operated
  o Proof of domain

                                                  11

EDD Tier 1 MRBs
• Site inspection
• Risk assessment
• Source of funds
• Beneficial ownership
• Point of sale terminal
• Background checks
• ATMs
• Seed to sale tracking

                           12

Implementing Your Cannabis
Banking Program
• Considerations from the top
  o Deposit operations, courier services, fees
  o Bring in staff resources in-house vs. contracting
    resources
• Program growth
  o Periodic program risk
    assessment
  o Understanding control
    strengths during growth
  o Aligning compliance resources with business
    strategy
                                                        13

Staffing Assessment For Now & The
Future
• Analyze & understand the amount of staff
  necessary for your current BSA/AML/OFAC
  Compliance Program

• Consider any control
  weaknesses identified
  in the three lines of
  defense

• Consider expertise levels
  o QC / Oversight

                                             14

Consultation For Your Cannabis
Banking Program
• Understanding BSA/AML & OFAC
• Understanding the regulatory expectations of
  community & regional financial institutions
• Understanding marijuana banking
• Having marijuana state law &
  regulation expertise
• Consultants, vendors,
  third-parties & working
  in harmony

                                                 15

Auditing Your Cannabis Program
• BSA/AML Compliance
• OFAC Compliance
• Understanding State &
  Regional Regulations &
  Guidance
• Controls in consideration of Program Growth
• Ensuring your internal audit has the effective SME
  to identify risks present when banking an MRB

                                                       16

State Regulations
• Through your CDD/EDD process, you must establish
  if the customer has any related business or dealings
  with other states.
• See whether the business is dually licensed &
  registered.
• From the proper authorities,
  request licensing information
  about the customer &
  related parties.

                                                         17

State-by-State
• Ever-changing landscape
• Currently, there are only 6 states where
  cannabis is illegal.
• Even if it’s legal, some
  states have caveats to
  the rule.
• Let’s talk New Jersey…

                                             18

Risk Based Customer Due Diligence
Requirements For BSA/AML Compliance
• Understanding that frequency & due diligence
  requirements have dependencies:
  o MRB tier classification
  o State law & regulation
  o Bank policy

• Using a third-party vendor to track CIP/KYC
• Using an internal tickler system
• Reaching customers to obtain refreshed
  documentation

                                                 19

Using Third-Party Software
• Assurance that state & local laws & regulation
  requirements are being implemented during
  patches
• Easier integration & less IT & operational
  maintenance
• Lowers risk of missing or
  misinterpreting regulations
  or due diligence deadlines.
• Higher upfront cost/contract

                                                   20

Using an In-House Tool
• More customization to your institution & customer
  base
• More IT or operations resources needed to
  maintain
• More rigorous
  validation processes
  required
• Lower upfront costs,
  no contract

                                                      21

Requesting Information From
Customers
• Whose responsibility?
• Ticklers to allow adequate time to respond
• Tracking expiring documents
• Ensuring customers have
  an understanding of their
  duty & responsibility
  prior to opening the
  relationship.
  o Does compliance have a channel to terminate the
    relationship?

                                                      22

Questions?

             23

Contact Us

    Dominic Hulick, CAMS    Kyle Dennerlein, CAMS, CCBP
           Supervisor           Senior BSA Analyst
    dhulick@Mercadien.com   kdennerlein@Mercadien.com
         609-689-2315              609-689-9700

                                                          24

Disclaimer
• DISCLAIMER: This advisory resource is for general
  information purposes only. It does not constitute
  business or tax advice, and may not be used and
  relied upon as a substitute for business or tax
  advice regarding a specific issue or problem. Advice
  should be obtained from a qualified accountant, tax
  practitioner or attorney licensed to practice in the
  jurisdiction where that advice is sought.